Contractual auditor controls — the final outcome
Credit providers seek to monitor customers’ performance over the lifespan of a funding transaction. The starting point for this is usually analysis of the audited annual accounts. Funders often place great store by who does the audit and frequently seek to control this by using so-called ‘auditor (or Big Four) clauses’ — these typically require the customer to use either a specified audit firm (usually from a list, often of the Big Four audit firms) or one otherwise approved by the funder.
An extensive reform of the audit process, including auditors’ duties and public oversight, has been in train in the EU since 2006 with the introduction of the Statutory Audit Directive.
As part of this, there has been a focus on ‘auditor clauses’ by both the European Commission and the UK competition authorities. We reported towards the end of last year on a proposal by the Competition Commission (now called the Competition and Markets Authority (CMA)) to issue an order prohibiting the use of ‘auditor clauses’ in loan agreements — in addition to restricting the ban just to loan agreements, the CMA also proposed an exception where ‘objectively justified auditor selection criteria’ could be met. What these criteria would extend to was never entirely clear — the CMA thought that they would include ‘appropriate skills’, but not ‘reputation’…
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